The last week or so has been scary in the financial markets. Stimulus talks abruptly broke down (again), the coronavirus outbreak looks to be spiking again, and there's a ton of uncertainty surrounding the election, availability of a vaccine, and the overall U.S. economy.
All of this tension led to the stock market's worst week in months, as all three major averages plunged by more than 5%. But what if this is just the beginning?
Image source: Getty Images.
Move One: Take a step back
Stock market corrections and crashes are a natural part of investing. In the past 25 years, we've had three full-scale crashes and numerous corrections, and the S&P 500 has still produced a total return of more than 800%.
Market crashes can certainly be scary. After all, nobody likes watching the value of his or her investments plummeting rapidly. But remember that the long-term direction of the stock market is up, so taking a deep breath and trying to keep calm is the first thing to do when the market crashes.
Move Two: Don't make any sudden movements
The average investor underperforms the stock market, and not by a small margin. One of the biggest reasons for this is that while the basic point of investing is to buy low and sell high, our instincts tell us to do the exact opposite. Specifically, when the stock market crashes, we tend to want to sell "before things get any worse."
Let me be 100% clear: The absolute worst thing you can do in a market crash is to start selling your stocks. If you had panicked and sold your investments in March, you would have locked in a loss of 30% or more at the bottom of the crash. On the other hand, if you had simply done nothing and let the crash run its course, you would have probably seen your investments bounce back and then some. Many investors don't realize it, but the S&P 500 has actually produced a positive total return so far in 2020.
If you're prone to knee-jerk reactions, it might even be a good idea to not check your 401(k) or brokerage balances for a while. In fact, there was a three-week period in March when I didn't look at my investment account balances once, especially my retirement accounts -- I logged in on occasion to my brokerage app to quickly buy some cheap stocks, but that's it.
Move Three: Calmly look for opportunities
As billionaire investor Warren Buffett once said, "The best chance to deploy capital is when things are going down." For a long-term investor, a market crash is a reason to look for great investment opportunities at a discount -- not a reason to sell.
I mentioned in the last section that the only reason I even logged on to my brokerage account in March was for the specific purpose of buying stocks that had become irrationally cheap. This is how I was able to scoop up shares of Pinterest (PINS +0.41%) for about $17 (currently about $60), Stitch Fix (SFIX 4.41%) at $14.50 (currently about $35), and iRobot (IRBT +0.00%) for less than $36 (currently about $80).
There were panic-fueled bargains all over the place in March, and while it's impossible to predict the timing, I can say with 100% certainty that this won't be the last irrational panic in the market. So if another crash comes, it's a reason to think a little offensively. That is, after you've taken a deep breath and make a conscious decision not to let the market "noise" cause you to join the panic.
